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Treasury yields ended at their lowest levels of the past three to five weeks on Thursday as traders considered a raft of risks to the U.S. economy, labor market, and Federal Reserve policy.
Read: Markets anticipate threat of Fed ‘policy mistake’ after Powell pushes back on March rate cut
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dropped 3.3 basis points to 4.194% from 4.227% on Wednesday. Thursday’s level is the lowest since Jan. 12, based on 3 p.m. Eastern time figures from Dow Jones Market Data. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 10.3 basis points to 3.862% from 3.965% on Wednesday. Thursday’s level is the lowest since Dec. 29. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
declined 11.4 basis points to 4.102% from 4.216% on Wednesday. Thursday’s level is the lowest since Jan. 3.
What drove markets
In data released on Thursday, initial jobless claims rose to an almost three-month high of 224,000 at the end of January, a sign of possible softening in the robust labor market.
Meanwhile, traders pushed back on the timing of the Federal Reserve’s first interest rate cut in 2024, and now see a 95.5% chance of at least a quarter-point reduction by May. However, they still mostly expect the central bank to lower borrowing costs to between 3.75%-4% before year-end from a current level of 5.25% to 5.5%.
While Fed Chair Jerome Powell managed to persuade traders to take the possibility of a March rate cut off the table this week, he hasn’t been able to convince them to give up on their expectations for as many as six quarter-point rate cuts in 2024.
Concerns about U.S. regional banks may have overshadowed the Fed’s policy announcement on Wednesday, analysts said. Shares of New York Community Bancorp
NYCB,
dropped on Thursday and Wednesday after the lender posted a surprise loss and disclosed it is having difficulties in commercial real estate. That, in turn, has triggered wider worries about regional banks generally.
The bond market began the week with four-week volatility on the 10-year yield settling into the fourth percentile versus the past three years — according to Bill Merz, the Minneapolis-based head of capital market research for U.S. Bank Wealth Management. This was a sign that investor expectations for Fed policy and inflation had been stabilizing as 2024 got under way, he said in an email to MarketWatch.
In other U.S. data released on Thursday, fourth-quarter productivity rose at a 2.7% pace compared with a year earlier. The final reading of the S&P manufacturing purchasing managers index for January came in at 50.7, slightly higher than previously estimated and the strongest improvement in manufacturing performance since September 2022. Meanwhile, the ISM factory index improved during January, but remained in contractionary territory.
Overseas, the Bank of England left interest rates unchanged at 5.25%.
What analysts are saying
Wednesday’s hawkish Fed statement and press conference by Powell “pushed back on the market’s desire and expectation of a March rate cut. The committee will have two more months of inflation data before their next meeting, but unless we have a rapid deterioration of the economy and labor force, we don’t see them cutting in March,” said Mike Sanders, head of fixed income at Madison Investments in Wisconsin.
“We echo the caution Chairman Powell expressed about services inflation. With goods inflation already below 2% and negative in some areas, achieving the Fed’s 2% target will depend heavily on a drop in services inflation,” Sanders wrote in an email to MarketWatch.
